March 27th, 2009 at 5:16 pm.
“The forthcoming Group of 20 meeting is a make-or-break event. Unless it comes up with practical measures to support the less developed countries, which are even more vulnerable than the developed ones, markets are going to suffer another sinking spell. [...] Institutions such as the International Monetary Fund face a novel task: to protect the periphery countries from a storm created in the developed world. [...] If they fail to do so, the periphery economies will suffer even more than those at the centre, because they are poorer and more dependent on commodities than the developed world. [...] If the periphery economies are allowed to collapse, the developed countries will also be hurt.” George Soros, writing in the FT.
“When this financial crisis began the theory of “decoupled” emerging markets was quickly shown to be a fiction. It was accompanied by an even bigger fiction - that low-income countries would not be affected because they are not as integrated in the global system. Now we know: the indirect blow for the poorest countries is even more painful. The economic crisis is hitting Africa’s poor hard, and countries who benefited so little from the process now stand to suffer the worst of its excesses - with the risks of wiping away recent development achievements,” Dr Donald Kaberuka, President of the African Development Bank
Introduction
In recent weeks a host of voices from George Soros to Kofi Annan, and institutions from the World Bank to UNCTAD, have sought to alert G20 leaders to fact that the global economic crisis is inflicting serious damage on some of the most vulnerable economies in the world. The UK government’s Department for International Development predicts that the crisis will push a further 90 million people below the poverty line; the IMF has revised sharply downwards its forecast for growth in developing countries in 2009. The World Bank has identified 43 developing countries it sees as highly exposed to the economic crisis, and the IMF has listed 26 low income countries as particularly vulnerable. The majority of countries in both lists are in sub-Saharan Africa, and South and Southeast Asia.
In line with these figures and predictions, Oxfam staff on the ground is already seeing first hand the negative impacts of the financial crisis hitting developing countries in which we work. The negative impacts are making people who were already vulnerable even more so and threatening to undo years of real progress in reducing poverty.
Initial snapshot
This is an initial snapshot based on a series of quick country-based assessments of varying length and complexity. As the crisis impact unfolds over 2009/10, Oxfam plans to carry out more in-depth studies in a number of countries in East Asia, Africa and Latin America, which will help us understand the nature of the impact, and the most effective responses for poor country governments and the international community.
These initial reports suggest that the most immediate impacts are being felt in regions that are more tightly linked to global markets - such as East Asia and Latin America. Meanwhile in much of Africa, the impacts of the financial crisis are still overshadowed by a lingering food price surge, and harder to differentiate from ongoing poverty and vulnerability caused and exacerbated by a number of factors including conflict and climate change.
Across the whole developing world there appears to be a lag effect - the first wave of impacts are now beginning to hit, but further waves are likely to break over poor countries during the course of this year and next.
Not ‘single sorrows’
Coming on top of the harsh effects of higher food and fuel prices and the increasing impacts of climate change, the impacts of the economic crisis in Africa and other very poor regions are putting further pressure on already-stretched coping mechanisms.
Although food prices on global markets have fallen back, recent data published by the UN’s Food and Agriculture Organisation and first hand research suggests that these reductions are not being passed on to poor consumers in developing countries.[1] When you spend up to 80% of your income of food, price increases of the scale seen in 2007-8 can make the difference between one meal a day and two. Levels of hunger and poverty had already started to rise even before the current crisis hit, with the World Bank estimating that some 150 million people had been pushed into poverty by soaring food prices.
Range of impacts
Oxfam’s research reveals a number of ways in which developing countries are being affected by the global economic downturn.
The most immediate is via the decline in global demand and the impact it has on employment in export-oriented sectors of the developing world.
- Developing countries’ exports in light manufacturing are falling. This has a major impact on women: In recent years millions of women have found work in export-oriented manufacturing in East Asia and Latin America. Many of these jobs are substandard, with little job security or labour rights. Now the crisis is making things worse - and having a devastating impact on their livelihoods, their rights and their families. Oxfam’s research in 10 countries shows that women are often first to be laid off, with employers refusing to pay outstanding wages and evading legal obligations to give notice and pay compensation. Many governments are turning a blind eye to these practices.
- Global demand for non-agricultural commodities is also declining, leading to falling exports, job losses and lower government revenue. For the last few years, commodities such as copper, diamonds, oil, and timber, have driven robust growth in many countries, particularly in Africa. The collapse in global demand has hit both prices and trade volumes, with a significant impact on jobs and balance of payments. Sierra Leone has laid off 90% of its diamond mine workers; in Zambia some 5,000 copper miners have been laid off, with each mining job sustaining an estimated 20 jobs in the informal economy; Botswana has temporarily mothballed the diamond mines that generate 80% of its exports.
Major sources of financing for development are also drying up as a result of the crisis:
- Private capital flows to developing countries are rapidly declining. Across the developing world, finance is grinding to a halt. Private capital flows to emerging markets are likely to be $165 billion in 2009, after an estimated $466 billion in 2008, and a record volume of $929 billion in 2007
- Remittances are falling. Worldwide, migrant workers send some $300bn a year back to developing countries, three times the volume of aid. As workers are laid off around the world there is a real danger that remittance flows will collapse, leaving many families struggling. Oxfam’s research shows that illegal migrants are particularly at risk both from redundancy and abusive employers. Remittances are also transferred within countries, from migrant workers in urban areas or industrial parks to families back in rural areas, as well as from overseas. In Vietnam and China, Oxfam has spoken to families planning to take girls out of school to try and raise family incomes. In Bangladesh, where 1 in 9 rural families depend on remittances, families are eating less. Serious impacts are hitting other remittance-dependent economies such as Sierra Leone and the Philippines. There were numerous reports of migrant workers from cities or working overseas moving back to rural areas, where they are often unable to find jobs and become an additional burden on relatives.
- As a result of declining economic activity, tax revenues of developing country governments are expected to fall as well as Official Development Aid putting growing strain on health, education and social protection budgets precisely at a moment of increased need. As a result, governments in the poorest countries will be highly constrained in their ability to run ‘countercyclical’ policies that use state spending to boost the economy. Many will depend on increased aid to fill the growing financing gap. But Oxfam is concerned that developed countries may use the downturn as an excuse to cut back the very aid that will be increasingly needed.
What the G20 must deliver
Poor countries, weakened by high food and energy prices during 2008, are rapidly becoming vulnerable to the negative impacts of the crisis. There is a real danger that significant gains made towards meeting the Millennium Development Goals could be wiped out. At the London Summit on April 2, and beyond, G20 leaders should:
- Agree a rescue package for poor countries of around $580bn a year. Rich countries have bailed out their own countries but poor countries can’t afford to. They need help, and they need it now. This figure is made up of 3 things: A ‘fiscal stimulus’ for poor countries of 3-5% of their GDP ($24bn to $41bn); delivery on the promise to give 0.7% of GNI as aid; debt relief to all countries that need it in order to meet their basic needs.
- Crack down on tax havens, which bleed money from rich and poor countries alike. This means ensuring automatic information exchange between all tax authorities and country by country reporting.
- Reform global governance, giving developing countries the same say as rich countries in decision making about economics and politics. This includes a fair seat at the table at the World Bank and IMF, and agreement that the African Union should be fully represented in all negotiations.
- Build action on climate change into the design of our new global economy. This includes G20 rich countries embarking on collaborative greening of their national fiscal stimulus packages
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